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April 29, 2011

Beneficiary Designations and Divorce Decrees: A Cautionary Tale

Does a last in time divorce decree or a beneficiary designation made at the time of the application years ago prevail when it comes time to make a claim? The answer is set forth in a cautionary tale of beneficiary designations told in the recent case of Boyd v. Metropolitan Life Insurance Company, 2:09-cv-03325-CWH (4th Circuit, 2011).

Emma C. Boyd had her estranged husband, Robert Alsager, sign a separation and property-settlement agreement to release him from any claims to her estate or property. Or so she thought.

Emma was an employee of Delta Airlines, Inc., and was covered by a Metropolitan Life Insurance Company insurance plan governed by ERISA. In 2001, Emma submitted forms designating Alsager as the primary beneficiary of her MetLife plan and her mother as a contingent beneficiary, meaning Emma’s mother would receive the life insurance benefits if Alsager refused to take them.

Around 2007, Emma and Alsager separated. Although Alsager signed a separation agreement, Emma did not remove him as the primary beneficiary under her MetLife plan—a designation she made while they were still married.

When Emma passed away in 2008, her mother and son (“the Boyds”) filed a claim with MetLife to obtain Emma’s life insurance benefits. So did Alsager. Relying on the plan documents on file, MetLife paid Emma’s insurance plan proceeds to her estranged husband.

The Boyds sent a letter to MetLife appealing its decision to pay the proceeds to Alsager, but MetLife denied their claim. The Boyds then brought suit in district court, but to no avail. Their appeal to the appellate court ended with the same result,

The Kennedy case established the obligations of plan administrators in relation to life insurance beneficiaries under ERISA and the “plan documents rule,” which requires plan administrators to look solely at “the directives of the plan documents” when determining the appropriate beneficiary. Thus, because Emma had the option of amending her plan beneficiary and failed to do so, MetLife acted properly in distributing Emma’s employer-sponsored life insurance benefits to Alsager.

The court ruling does not nullify the separation agreement; it merely makes clear that the terms of the separation agreement are not issues for the plan administrator to decide. Rather, ERISA and the “plan documents rule” are designed to provide a bright line rule for determining the proper beneficiary under a life insurance policy. As Justice Wilkinson wrote, the Kennedy case provides a standard that is clear and sensible, and MetLife therefore did what it was required to do by law.

The moral of this cautionary tale? Don’t rely on separation agreements or divorce decrees as the be-all and the end-all of your clients’ marriages. Keeping tabs on beneficiary designations will strengthen your client relationships and ensure that your clients’ coverage remains suitable for their changing needs, especially after a separation or divorce. Knowing when to contact clients to ensure their beneficiary designations are up-to-date is not only a skill that your clients are sure to appreciate, but will boost your reliability and reputation in the industry as well.